Will Canceling a Credit Card Hurt My Ability to Get Credit

Deciding to cancel a credit card is a decision that should be carefully considered, as it can potentially impact your ability to obtain credit in the future. While closing an unused or unwanted credit card might seem like a simple solution, it’s crucial to understand the potential ramifications on your credit score and overall creditworthiness.

The Impact of Canceling a Credit Card

Canceling a credit card can have a ripple effect on various aspects of your credit profile. The extent of the impact largely depends on your credit history, credit utilization, and the age of the account being closed. In some cases, the consequences can be minimal, while in others, it may lead to a noticeable drop in your credit score.

When you cancel a credit card, you’re essentially reducing your overall available credit limit. This action can inadvertently increase your credit utilization ratio, which is the percentage of your total credit limit that you’re currently using. A higher credit utilization ratio is generally viewed as a negative factor by lenders, as it may indicate potential financial strain or a higher risk of defaulting on payments.

Furthermore, closing an older credit card can shorten the average age of your credit accounts, which is another crucial factor in determining your credit score. A longer credit history is typically seen as a positive indicator of responsible credit management, so closing an account you’ve had for many years could potentially lower your score.

Credit Utilization and Available Credit

Your credit utilization ratio plays a significant role in your credit score calculation. Generally, it’s recommended to keep your credit utilization below 30% of your total available credit limit. Closing a credit card account reduces your overall available credit, which can inadvertently increase your credit utilization ratio, even if you haven’t increased your spending.

For example, let’s say you have two credit cards with a combined credit limit of $10,000, and you’re currently carrying a balance of $2,000. Your credit utilization ratio would be 20% ($2,000 / $10,000). However, if you cancel one of those cards with a $5,000 limit, your available credit would drop to $5,000, resulting in a credit utilization ratio of 40% ($2,000 / $5,000).

A high credit utilization ratio can be a red flag for lenders, as it may suggest that you’re overextended or struggling to manage your debt. This, in turn, can negatively impact your ability to secure new lines of credit or obtain favorable interest rates.

Credit History and Credit Mix

Your credit history is another crucial factor that lenders evaluate when considering your creditworthiness. The length of your credit history accounts for approximately 15% of your FICO credit score calculation. Canceling an older credit card can inadvertently shorten the average age of your accounts, which could potentially lower your score.

Additionally, maintaining a healthy mix of different types of credit accounts, such as revolving credit (credit cards) and installment loans (auto loans, mortgages), can benefit your credit score. Canceling a credit card may disrupt this balance, potentially affecting your credit mix and, consequently, your overall score.

Alternatives to Canceling a Credit Card

Before taking the drastic step of canceling a credit card, it’s worth exploring alternative options that may have a less severe impact on your credit score. One option is to downgrade to a no-annual-fee card instead of closing the account entirely. This way, you maintain your credit history and available credit while avoiding unnecessary fees.

Another alternative is to keep the card open but refrain from using it. While this approach may not be practical for cards with annual fees, it can help preserve your credit history and credit utilization ratio, especially for older accounts.

If you’re considering canceling a card due to unfavorable terms or high fees, it’s worthwhile to contact the issuer and negotiate for better terms or a waived annual fee. Many issuers are willing to work with long-standing customers to retain their business.

If you’ve carefully weighed the pros and cons and still decide to cancel a credit card, there are strategies you can employ to minimize the potential impact on your credit score:

  • Apply for a new credit card before canceling an old one. This can help offset the loss of available credit and maintain your credit utilization ratio.
  • Pay down balances on your remaining credit cards to lower your credit utilization ratio.
  • Monitor your credit reports regularly after canceling a card, and dispute any errors or inaccuracies that may arise.

It’s also crucial to remember that the impact of canceling a credit card is typically temporary. If you continue to practice responsible credit management, such as making payments on time and keeping balances low, your credit score should recover over time.